Citadel not eyeing BoA unit: source

BOSTON (Reuters) - Citadel Investment Group is not negotiating to buy Bank of America's (BAC.N) prime brokerage unit, a source close to Citadel said, throwing cold water on a media report the hedge fund firm has inspected the bank's books.

"There have been no conversations about it and Citadel has not looked at the books," said the source, who is close to the situation but not authorized to speak about it.

Citadel spokeswoman Katie Spring declined to comment.

A report in Thursday's edition of the New York Post said America's second-biggest bank is mulling a sale to Citadel.

Banks' prime brokerage units are essential to the fast-growing $2 trillion hedge fund industry because they loan money to these loosely regulated portfolios, clear their trades and introduce them to potential investors.

Often these units generate significant revenue for banks at a time hedge funds are being included in more portfolios.

The Post, citing unnamed sources, said Bank of America is ready to sell its prime brokerage unit and its public financing unit, which provides lending for city, state and local government projects. In the past BoA Chief Executive Ken Lewis said he wanted to scale back investment banking operations amid recent earnings declines.

Bank of America spokeswoman Melissa Kitlowski said, "We decline to comment on market rumors."

Citadel, a $15 billion hedge fund firm that traces its roots back to founder Ken Griffin's Harvard College dormitory room, has been expanding its businesses by sometimes buying up ailing businesses. Most recently it led a group of investors in injecting $2.5 billion into Internet bank and brokerage firm E*Trade. Before that Citadel bought failing hedge fund Sowood Capital's troubled credit portfolio and bankrupt sub-prime mortgage lender ResMAE Mortgage Corp.

(Reporting by Svea Herbst-Bayliss and Ed Leefeldt; Editing by Steve Orlofsky)